Booster shot for United

Deal with Chase Bank to provide $1.2 billion infusion of needed cash

United Airlines got a much-needed boost of confidence, as well as $1.2 billion in cash, from credit card partner Chase Bank, sending its shares soaring 69 percent Tuesday.

The deal, unveiled during United parent UAL Corp.'s earnings call, appeared to quell investor concerns about the carrier's viability as high oil prices, a sputtering economy and a looming seasonal falloff in travel threaten to drain airlines' cash.

Analysts think that unless oil prices fall dramatically, mounting financial pressures will send one or more large airlines into bankruptcy in the next year. Those that can amass hefty cash reserves stand the best chance of surviving the tumult.

Chicago-based United appeared vulnerable after recording larger losses than its peers during the first six months. But Chase's decision to buy about $600 million of its frequent-flier miles far in advance suggests the powerful New York bank, which has deep ties to United, views the carrier as a survivor.

"The market is assured that United is not going into bankruptcy any time soon," said Roger King, airline analyst with CreditSights Inc.

United Chief Executive Glenn Tilton also provided new details of a partnership with Continental Airlines that could increase United's global reach and of cuts intended to reduce its overhead. United plans to eliminate 7,000 jobs by the end of 2009 and won't hesitate to cut deeper if the market declines, officials said.

Tilton said the nation's second-largest carrier is mapping out plans to expand its partnership with Houston-based Continental, billed by some as a "virtual merger," to give passengers far more connections to Latin America, the most profitable international region for air travel. In addition, they plan this week to formally request antitrust immunity to coordinate North Atlantic flights along with German carrier Lufthansa and Air Canada.

Continental plans to join the Star Alliance, which United co-founded along with Lufthansa, but can't exit its current alliance until two prominent members, Delta Air Lines and Northwest Airlines, close their merger.

"Nothing's going to happen there that's going to make them money any time soon," King said of United's venture with Continental, announced in June.

That's where United's ties with Chase come into play, a close relationship that Chase inherited from Bank One Corp., a Chicago-based bank it acquired in 2004. In addition to processing United's credit card transactions, Chase owns the Mileage Plus affinity card, whose users accrue United frequent-flier miles with every purchase.

On Tuesday, Chase agreed to restructure terms of an agreement, which required it to hold $375 million of United's funds in reserve as insurance against a sudden deterioration in United's ability to provide travel purchased via credit card.

Under the new agreement, United's holdback has been reduced to $25 million, freeing up $350 million in previously restricted cash.

Once its new agreement with Chase closes, and including the $600 million of frequent-flier miles, United's unrestricted cash will increase by about $1 billion, said spokeswoman Jean Medina. United also expects the transaction to increase its cash flow by about $200 million over the next two years.

United has $3 billion in unencumbered assets that it could use to raise capital.

What's unknown is how long it will take United and most other major carriers to right their operations.

United ended the second quarter with about $2.9 billion in unrestricted cash, roughly the same amount of cash that it had at the beginning of the period, even though its raised $550 million in a series of financings during the period.

United suffered a net loss of $2.73 billion, or $21.47 a diluted share, compared with earnings in the year-ago quarter of $274 million, or $1.83 a share.

However, United's losses were magnified by $2.28 billion in accounting charges to write down goodwill on its balance sheet.

Excluding all charges, United lost $151 million or $1.19 per share, far less than the $2.05-a-share deficit experts had been forecasting.

United shares gained $3.42, to $8.41.

United plans to reduce its schedule by up to 11.5 percent in the fourth quarter, year over year, and by as much as 9 percent next year. Many of its competitors are likewise lopping their route networks on an unprecedented scale. It's anybody's guess if that will force up ticket prices or how consumers will respond.

"It's not as if everything is going to go away," said aviation analyst Robert Mann. "But figuring the winners and losers is a gamble."